Has Regulation G Improved the Information Quality of Non-GAAP Earnings Disclosures?

Abstract

This paper examines whether the reported decreased frequency of non-GAAP earnings disclosures post Regulation G reflects either intended or unintended consequences of the Sarbanes-Oxley Act of 2002. Based on hand-collected non-GAAP earnings disclosures from 2001 to mid 2004, this paper finds that firms with communication motives, proxied by historically low returns-GAAP earnings relation, are more likely to disclose non-GAAP earnings in the post-Reg G period than in the pre-Reg G period. In contrast, firms with opportunistic motives, proxied by GAAP loss and negative GAAP EPS changes, are less likely to disclose non-GAAP earnings in the post-Reg G period than in the pre-Reg G period. The paper also provides evidence that non-GAAP earnings are more value-relevant, and income-increasing non-GAAP adjustments are less misleading and more transitory, in the post-Reg G period than in the pre-Reg G period. Overall, the findings of this paper appear consistent with Congress' and the SEC's intervention in pro-forma reporting practices resulting in improvements in the quality of information provided in non-GAAP earnings disclosures.